NDCHEALTH CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 26, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-12392

NDCHealth Corporation

(Exact name of registrant as specified in charter)


DELAWARE		58-0977458
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

NDC Plaza, Atlanta, Georgia		30329-2010
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 404-728-2000

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, Par Value $.125 – 36,054,270 shares

outstanding as of March 8, 2005

NDCHEALTH CORPORATION

FORM 10-Q

FOR THE FISCAL QUARTER ENDED NOVEMBER 26, 2004

TABLE OF CONTENTS


	Part I FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Statement of Operations for the three months ended November 26, 2004 and November 28, 2003 (Unaudited)	2
	Condensed Consolidated Statement of Operations for the six months ended November 26, 2004 and November 28, 2003 (Unaudited)	3
	Condensed Consolidated Statement of Cash Flows for the six months ended November 26, 2004 and November 28, 2003 (Unaudited)	4
	Condensed Consolidated Balance Sheets at November 26, 2004 and May 28, 2004 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

	Part II OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 2.	Unregistered Sales of Securities and Use of Proceeds	45

Item 3.	Default upon Senior Securities	45

Item 4.	Submission Of Matters to a Vote of Security Holders	45

Item 5.	Other Information	46

Item 6.	Exhibits and Reports on Form 8-K	46

Signatures		48

PART I—FINANCIAL INFORMATION

Item 1—FINANCIAL STATEMENTS

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
				(As Restated)
Revenue	$	117,407		$	109,238


Operating Expenses:
Cost of Service		70,962			53,593
Sales, General and Administrative		26,123			23,618
Depreciation and Amortization		10,399			8,756
Restructuring and Other Charges		2,216			1,798

		109,700			87,765

Operating Income		7,707			21,473


Other Income (Expense):
Interest and Other Income		78			155
Interest and Other Expense		(6,175	)		(7,319	)
Minority Interest in Earnings		(135	)		(267	)

		(6,232	)		(7,431	)


Income from Continuing Operations before Income Taxes		1,475			14,042

Provision for Income Taxes		574			5,256

Income from Continuing Operations		901			8,786
(Loss) from Discontinued Operations		(5,670	)		(1,221	)

Net Income (Loss)	$	(4,769	)	$	7,565


Basic (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.03		$	0.25

Discontinued Operations	$	(0.16	)	$	(0.04	)

Basic (Loss) Income Per Share	$	(0.13	)	$	0.22

Weighted Average Shares		35,667			34,824

Diluted (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.03		$	0.25

Discontinued Operations	$	(0.16	)	$	(0.03	)

Diluted (Loss) Income Per Share	$	(0.13	)	$	0.21

Weighted Average Shares		35,894			35,619

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Six Months Ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
				(As Restated)
Revenue	$	226,535		$	211,903


Operating Expenses:
Cost of Service		137,673			105,089
Sales, General and Administrative		49,852			45,920
Depreciation and Amortization		20,836			17,397
Restructuring and Other Charges		2,216			3,297

		210,577			171,703

Operating Income		15,958			40,200


Other Income (Expense):
Interest and Other Income		143			257
Interest and Other Expense		(12,579	)		(14,540	)
Minority Interest in Earnings		(243	)		(418	)

		(12,679	)		(14,701	)


Income from Continuing Operations before Income Taxes		3,279			25,499

Provision for Income Taxes		1,278			9,552

Income from Continuing Operations		2,001			15,947
Loss from Discontinued Operations		(13,735	)		(1,755	)

Net (Loss) Income	$	(11,734	)	$	14,192


Basic (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.06		$	0.46

Discontinued Operations	$	(0.39	)	$	(0.05	)

Basic (Loss) Income Per Share	$	(0.33	)	$	0.41

Weighted Average Shares		35,653			34,785

Diluted (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.06		$	0.45

Discontinued Operations	$	(0.38	)	$	(0.05	)

Diluted (Loss) Income Per Share	$	(0.33	)	$	0.40

Weighted Average Shares		35,948			35,367

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended
*(In thousands)*	November 26, 2004			November 28, 2003
				(As Restated)
Cash flows from operating activities:
Net (loss) income	$	(11,734	)	$	14,192
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Loss on discontinued operations		13,735			1,755
Non-cash restructuring and other charges		317			453
Depreciation and amortization		20,836			17,397
Deferred income taxes		1,083			8,156
Allowance for doubtful accounts		4,213			4,459
Other, net		2,640			2,410

Total		31,090			48,822
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable		(1,014	)		(8,908	)
Prepaid expenses and other assets		7,310			978
Accounts payable and accrued liabilities		(9,240	)		7,881
Accrued interest on long-term debt		(210	)		(214	)
Deferred revenue		(15,536	)		4,423

Net cash provided by operating activities		12,400			52,982

Cash flows from investing activities:
Capital expenditures		(17,963	)		(21,639	)
Proceeds from the sale of equipment		513			2,148
Acquisitions and other investing activities		(2,412	)		(6,347	)

Net cash used in investing activities		(19,862	)		(25,838	)

Cash flows from financing activities:
Net borrowings under lines of credit		38,500			—
Net principal payments under long-term debt arrangements		(39,208	)		(1,916	)
Net cash used in refinancing activities		—			(395	)
Net cash received related to stock activities		510			2,647
Dividends paid		(2,880	)		(2,820	)

Net cash used in financing activities		(3,078	)		(2,484	)

Net cash used in discontinued operations		(2,834	)		(2,285	)

(Decrease) increase in cash and cash equivalents		(13,374	)		22,375
Cash and cash equivalents, beginning of period		27,617			15,150

Cash and cash equivalents, end of period	$	14,243		$	37,525

Supplemental Disclosures
Cash paid for
Interest	$	10,433		$	14,971
Income taxes (refunded) paid	$	(499	)	$	755

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


*(In thousands, except share data)*	November 26, 2004			May 28, 2004
				(As Restated)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	14,243		$	27,617
Accounts Receivable (Less Allowance of $8,218 and $7,568, respectively.)		64,829			69,110
Deferred Income Taxes		1,076			28,389
Prepaid Expenses		18,810			22,146
Other Current Assets		12,564			15,389
Total Assets of Discontinued Operations		44,047			70,459

Total Current Assets		155,569			233,110

Property and Equipment, Net		78,815			80,666
Capitalized External Use Software, Net		65,724			61,567
Goodwill		363,829			362,429
Intangible Assets, Net		66,823			71,760
Debt Issuance Cost		12,543			12,963
Deferred Income Taxes		11,771			—
Other Assets		23,278			22,561

Total Assets	$	778,352		$	845,056

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-term Debt	$	42,318		$	33,656
Trade Accounts Payable		25,681			29,693
Accrued Compensation and Benefits		7,754			6,252
Accrued Interest		10,713			10,923
Deferred Revenue		42,667			54,214
Other Accrued Liabilities		30,751			35,757
Total Liabilities of Discontinued Operations		11,591			24,761

Total Current Liabilities		171,475			195,256

Deferred Revenue		2,655			7,208
Deferred Income Taxes		—			14,600
Other Non-current Liabilities		26,984			29,225
Long-term Debt		260,249			269,619

Total Liabilities		461,363			515,908

Commitments and Contingencies		—			—
Minority Interest in Equity of Subsidiaries		1,556			1,313
Stockholders' Equity:
Preferred Stock, par value $1.00 per share; 1,000,000 shares authorized, none issued		—			—
Common Stock, par value $.125 per share; 200,000,000 shares authorized; 36,025,273 and 36,006,641 shares issued, respectively.		4,503			4,501
Capital in excess of par value		245,921			245,314
Retained Earnings		65,813			80,426
Deferred Compensation		(6,715	)		(7,694	)
Other Comprehensive Income		5,911			5,288

Total Stockholders' Equity		315,433			327,835

Total Liabilities and Stockholders' Equity	$	778,352		$	845,056

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

Note 1—Nature of Operations

NDCHealth Corporation (“NDCHealth,” the “Company,” or “we” and other similar pronouns) conducts its business through three reportable segments: Network Services and Systems, Information Management and Pharmacy Benefit Services. The Network Services and Systems segment provides network-based information processing services and systems to healthcare providers, including pharmacies, hospitals and physicians, in the U.S. and Canada. The Information Management segment provides data products and solutions primarily to pharmaceutical manufacturers. The Pharmacy Benefit Services segment, a consolidated subsidiary in which we maintain a 49% controlling ownership interest, provides various pharmacy benefit plan services primarily to healthcare payers.

Note 2—Summary of Significant Accounting Policies

Basis of Consolidation

The Condensed Consolidated Financial Statements include the accounts of NDCHealth Corporation and its majority-owned and controlled companies. Significant inter-company transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current year presentation. Our fiscal year begins on the Saturday closest to June 1 and ends on the Friday closest to May 31. Interim quarters typically consist of thirteen weeks ending the Friday closest to the last calendar day of August, November, and February. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K/A for the year ended May 28, 2004 filed with the SEC.

In May 2004, we made the decision to divest our European businesses. As a result, our financial statements have been prepared with our European businesses’ assets and liabilities, results of operations, and cash flows displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Restatement of Financial Statements

The restated financial statements for the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002 are reflected in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004, which is being filed concurrently with this Quarterly Report on Form 10-Q for the quarter ended November 26, 2004. In addition, the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 27, 2004 is being filed concurrently with this Quarterly Report and reflects the restated financial statements for the periods covered by that Quarterly Report. Throughout this Quarterly Report on Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Earnings Per Share

SFAS No. 128, “Earnings per Share,” requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period and the impact of securities that, if exercised, would have a dilutive effect on earnings per share. All options with an exercise price less than the average market share price for the period have a dilutive effect on earnings per share.

The following tables set forth the computation of basic and diluted earnings for the three and six months ending November 26, 2004 and November 28, 2003:


	Three Months Ended
	November 26, 2004							November 28, 2003
*(In thousands, except per share data)*	Income			Shares	Per Share			Income		Shares	Per Share
								(As Restated)			(As Restated)
Basic EPS:
Net (Loss) Income	$	(4,769	)	35,667	$	(0.13	)	$	7,565	34,824	$	0.22
Diluted EPS:
Effect of dilutive securities:
Stock options and restricted stock				227						795

Net (Loss) Income plus assumed conversions	$	(4,769	)	35,894	$	(0.13	)	$	7,565	35,619	$	0.21


	Six Months Ended
	November 26, 2004							November 28, 2003
*(In thousands, except per share data)*	Income			Shares	Per Share			Income		Shares	Per Share
								(As Restated)			(As Restated)
Basic EPS:
Net (Loss) Income	$	(11,734	)	35,653	$	(0.33	)	$	14,192	34,785	$	0.41
Diluted EPS:
Effect of dilutive securities:
Stock options and restricted stock				295						582

Net (Loss) Income plus assumed conversions	$	(11,734	)	35,948	$	(0.33	)	$	14,192	35,367	$	0.40

Income from Continuing Operations of $0.9 million and $8.8 million in the three months ended November 26, 2004 and November 28, 2003 resulted in basic earnings per share of $0.03 and $0.25 and diluted earnings per share of $0.03 and $0.25, respectively. Income from Continuing Operations of $2.0 million and $15.9 million in the six months ended November 26, 2004 and November 28, 2003 resulted in basic earnings per share of $0.06 and $0.46 and diluted earnings per share of $0.06 and $0.45, respectively.

Outstanding options to purchase 2,881,500 and 1,682,000 shares of common stock were not included in the computation of diluted earnings per share for the three months ended November 26, 2004 and November 28, 2003, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock for those periods. Outstanding options to purchase 3,516,000 and 843,000 shares of common stock were not included in the computation of diluted earnings per share for the six months ended November 26, 2004 and November 28, 2003, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock for those periods. For the three months ended November 26, 2004 and November 28, 2003, dividends declared per common share were $0.04. For the six months ended November 26, 2004 and November 28, 2003, dividends declared per common share were $0.08.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Stock Options

We have chosen the disclosure option under SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) and SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123,” and continue to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for options granted under the plans. The weighted average fair value of options granted during the three months ended November 26, 2004 and November 28, 2003 was approximately $8.17 and $11.54, respectively. The weighted average fair value of options granted during the six months ended November 26, 2004 and November 28, 2003 was $6.78 and $9.20, respectively. Had compensation cost for these plans been recognized based on the fair value of the options at the grant dates in accordance with SFAS No. 123, the effect on our Net (Loss) Income and Earnings (Loss) Per Share would have been as follows:


	Three Months Ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
				(As Restated)
Net (Loss) Income:
As reported	$	(4,769	)	$	7,565
Add: Stock-based compensation (restricted stock) expense included in reported Net (Loss) Income, net of related tax effects		592			404
Deduct: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects		(2,218	)		(2,006	)

Pro forma	$	(6,395	)	$	5,963

Basic (Loss) Earnings Per Share:
As reported	$	(0.13	)	$	0.22
Pro forma	$	(0.18	)	$	0.17
Diluted (Loss) Earnings Per Share:
As reported	$	(0.13	)	$	0.21
Pro forma	$	(0.18	)	$	0.17


	Six Months Ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
				(As Restated)
Net (Loss) Income:
As reported	$	(11,734	)	$	14,192
Add: Stock-based compensation (restricted stock) expense included in reported Net (Loss) Income, net of related tax effects		958			854
Deduct: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects		(4,500	)		(4,451	)

Pro forma	$	(15,276	)	$	10,595

Basic (Loss) Earnings Per Share:
As reported	$	(0.33	)	$	0.41
Pro forma	$	(0.43	)	$	0.30
Diluted (Loss) Earnings Per Share:
As reported	$	(0.33	)	$	0.40
Pro forma	$	(0.42	)	$	0.30

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

New Accounting Pronouncements

In December 2004, the FASB issued SFAS 123 (R), “Share-Based Payment,” (“SFAS 123 (R)”) which replaces SFAS 123 and supersedes APB 25. SFAS No. 123 (R) requires that compensation cost relating to all share-based payment transactions, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123 (R) is effective the first interim or annual reporting period that begins after June 15, 2005. NDCHealth expects to adopt SFAS 123 (R) on September 3, 2005 and expects to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date (a) based on the requirements of SFAS 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123 (R) that remain unvested on the effective date.

Note 3—Discontinued Operations

During the fourth fiscal quarter of 2004, NDCHealth’s management performed a review of our European businesses to determine alternatives to mitigate losses associated with these operations. As a result of this review, our Board of Directors authorized the disposition of our European businesses. Accordingly, our financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of these operations displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation.

In the second quarter of fiscal 2005 the Company completed the sale of its United Kingdom operations which resulted in a net gain of $1.7 million or $0.05 per share. The Company is also negotiating with interested buyers for the remaining German portion of its European business.

The loss from operations for the three months ended November 26, 2004 from the European businesses was less than $0.1 million. The loss from operations for the three months ended November 28, 2003 was $1.2 million, or $0.03 per share. The loss from operations for the European businesses was $0.5 million, or $0.01 per share for the six months ended November 26, 2004. The loss from operations for the six months ended November 28, 2003 was $1.8 million, or $0.05 per share. In the first and second quarters of fiscal 2005 management determined the Company would receive lower than previously expected total transaction proceeds based on current negotiations as of the filing date for each quarterly report. As a result, the carrying value of this asset was reduced, which increased the Loss from Discontinued Operations by $7.6 million, or $0.21 per share and $7.4 million, or $0.20 per share in the first and second quarter of fiscal 2005, respectively. For the six months ended November 26, 2004 the total Loss from Discontinued Operations was $(13.7) million or $0.38 per diluted share.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The operating results of our Discontinued Operations are summarized as follows:


	Three months ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
Revenue	$	4,935		$	4,811
Operating Income / (Loss)	$	304		$	(2,058	)
Income / (Loss) from Operations, net of Tax	$	(15	)	$	(1,221	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(7,357	)	$	—

Income / (Loss) from Discontinued Operations	$	(5,670	)	$	(1,221	)

Diluted Earnings / (Loss) per Share:
From Operations	$	—		$	(0.03	)

Gain on Sale of UK Businesses	$	0.05		$	—

From Asset Valuation Adjustment	$	(0.20	)	$	—

Total	$	(0.16	)	$	(0.03	)


	Six months ended
*(In thousands, except per share data)*	November 26, 2004			November 28, 2003
Revenue	$	10,221		$	10,061
Operating Loss	$	(253	)	$	(2,400	)
Loss from Operations, net of Tax	$	(472	)	$	(1,755	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(14,965	)	$	—

Loss from Discontinued Operations	$	(13,735	)	$	(1,755	)

Diluted Earnings / (Loss) per Share:
From Operations	$	(0.01	)	$	(0.05	)

Gain on Sale of UK Businesses	$	0.05		$	—

From Asset Valuation Adjustment	$	(0.42	)	$	—

Total	$	(0.38	)	$	(0.05	)

The Net Loss from Discontinued Operations for the three months November 28, 2003 is net of a tax benefit of $0.6 million. The Net Loss from Discontinued Operations for the six months ended November 26, 2004 and November 28, 2003 is net of a tax benefit of approximately $0.1 million and $0.7 million, respectively.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The total assets and liabilities of Discontinued Operations are summarized as follows:


*(In thousands)*	November 26, 2004		May 28, 2004
Assets
Cash and Cash Equivalents	$	808	$	983
Accounts Receivable, Net		1,481		2,173
Prepaid and Other Assets		12,534		13,608
Property and Equipment, Net		1,468		1,776
Goodwill		26,482		50,739
Intangible Assets, Net		1,274		1,180

Total Assets of Discontinued Operations	$	44,047	$	70,459

Liabilities
Accounts Payable and Accrued Liabilities	$	3,462	$	15,210
Deferred Revenue		984		2,246
Other Long-Term Liabilities		2,732		2,531
Minority Interest		4,413		4,774

Total Liabilities of Discontinued Operations	$	11,591	$	24,761

Material contingent liabilities related to Discontinued Operations are discussed in Note 8—Commitments and Contingencies.

Note 4—Restructuring and Other Charges

In the first six months of fiscal year 2004, with the completion of the TechRx acquisition, we began a review of NDCHealth to identify opportunities for increased operational efficiencies. Consequently, in the first six months of fiscal 2004, we recorded a charge of $3.0 million for severance related costs, $0.1 million related to lease terminations, and $0.2 million related to impairment of a note receivable we received as partial payment for the sale of a non-core operation.

During the second quarter of fiscal 2005, in an effort to reduce costs and consolidate certain senior management positions within the organization, we terminated five positions. Eliminations of these positions will allow the company to better align its resources with key opportunities and bring decision making closer to the customers. We recorded a charge of $2.2 million for severance related costs, which include $0.9 million in the Network Services and Systems segment, $0.4 million in the Information Management Segment, and $0.9 million in the Other segment. Of the $2.2 million incurred in the second quarter of fiscal 2005, $1.9 million was cash and $0.3 million was a non-cash charge in accordance with FASB Interpretation Number 44, “Accounting for Certain Transactions Involving Stock Compensation.”

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)


	Three Months Ended
*(In thousands)*	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	1,415
Exit-related costs		—		32
Asset reserves		—		187
Acquisition related costs		—		164

Total	$	2,216	$	1,798

By Segment:
Network Services and Systems	$	911	$	757
Information Management		433		58
Other		872		983

Total	$	2,216	$	1,798


	Six Months Ended
*(In thousands)*	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	2,698
Exit-related costs		—		147
Asset reserves		—		187
Acquisition related costs		—		265

Total	$	2,216	$	3,297

By Segment:
Network Services and Systems	$	911	$	1,426
Information Management		433		613
Other		872		1,258

Total	$	2,216	$	3,297

The following table shows the fiscal 2005 activity related to the restructuring liabilities, which are included in Other Accrued Liabilities in the Condensed Consolidated Balance Sheets:


	Network Services and Systems						Information Management			Other
	Severance			Exit-Related			Severance			Severance			Total
Balance, May 28, 2004 (As Restated)	$	729		$	837		$	175		$	799		$	2,540
Restructuring		731			—			433			735			1,899
Cash expenditures		(603	)		(189	)		(155	)		(692	)		(1,639	)

Balance, November 26, 2004	$	857		$	648		$	453		$	842		$	2,800

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 5—Goodwill

The changes in the carrying amount of Goodwill for the six months ended November 26, 2004 are as follows:


*(In thousands)*
Goodwill	Network Services and Systems		Information Management		Total
Balance as of May 28, 2004 (As Restated)	$	323,411	$	39,018	$	362,429
Purchase price adjustments and currency translation		1,195		205		1,400

Balance as of November 26, 2004	$	324,606	$	39,223	$	363,829

We assess the recoverability of goodwill on at least an annual basis during the Company’s second quarter, or more frequently if circumstances suggest potential impairment. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. We completed our annual impairment testing during the second quarter of fiscal 2005. For each of our reporting units, we found that the estimated fair value exceeded the net book value of the unit and therefore the second step of the impairment test was not necessary.

Note 6—Intangible Assets, Net

The table below presents Intangible Assets by asset class:


*(In thousands)*	As of November 26, 2004							As of May 28, 2004
	Gross Carrying Amount		Accumulated Amortization			Total		Gross Carrying Amount		Accumulated Amortization			Total
Customer base	$	80,828	$	(25,807	)	$	55,021	$	80,828	$	(22,012	)	$	58,816
Data rights agreement		10,409		(1,363	)		9,046		10,409		(620	)		9,789
Reseller and other		3,600		(844	)		2,756		3,600		(445	)		3,155

Total Intangible Assets	$	94,837	$	(28,014	)	$	66,823	$	94,837	$	(23,077	)	$	71,760

The aggregate amortization expense for the three months and six months ended November 26, 2004 was $2.5 million and $4.9 million, respectively, and estimated amortization expense for the next five fiscal years is as follows:


Estimated Amortization Expense	*(In thousands)*
For year Ending May 27, 2005	$	9,873
For year Ending June 02, 2006	$	9,873
For year Ending June 01, 2007	$	9,823
For year Ending May 30, 2008	$	9,533
For year Ending May 29, 2009	$	9,418

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 7—Segment Information

Segment information for the three months and six months ended November 26, 2004 and November 28, 2003 is presented below. We operate our business as three fundamental reportable segments: Network Services and Systems, which we offer to healthcare providers and payers; Information Management, which we offer primarily to pharmaceutical manufacturers; and Pharmacy Benefit Services, which we offer to third party payers. Network Services and Systems provides electronic connectivity to the NDCHealth intelligent network and system solutions throughout the healthcare industry. Information Management provides management information, research and analytic services primarily to pharmaceutical manufacturers. Pharmacy Benefit Services provides prescription benefit management services. Other includes Restructuring and Other Charges not attributable to a specific segment. The information presented below excludes Discontinued Operations. There has been no significant change in the composition of the reportable segments from the presentation of fiscal 2004 segment information included in our Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 filed with the SEC.


	Three Months Ended
*(In thousands)*	November 26, 2004			November 28, 2003
				(As Restated)
Revenue:
Network Services and Systems	$	60,354		$	66,799
Information Management		38,402			37,637
Pharmacy Benefit Services		18,651			4,802

Total Revenue	$	117,407		$	109,238

Income (Loss) from Continuing Operations before Income Taxes:
Network Services and Systems	$	(263	)	$	9,970
Information Management		2,477			4,794
Pharmacy Benefit Services		133			261
Other		(872	)		(983	)

Total Income from Continuing Operations before Income Taxes	$	1,475		$	14,042


	Six Months Ended
*(In thousands)*	November 26, 2004			November 28, 2003
				(As Restated)
Revenue:
Network Services and Systems	$	117,930		$	129,065
Information Management		73,722			73,394
Pharmacy Benefit Services		34,883			9,444

Total Revenue	$	226,535		$	211,903

Income (Loss) from Continuing Operations before Income Taxes:
Network Services and Systems	$	1,141		$	18,993
Information Management		2,773			7,355
Pharmacy Benefit Services		237			409
Other		(872	)		(1,258	)

Total Income from Continuing Operations before Income Taxes	$	3,279		$	25,499

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 8—Commitments And Contingencies

Our Board of Directors has authorized the disposition of our European operations in Germany and the United Kingdom, which are recorded as discontinued operations. We currently provide pharmaceutical information services solutions to our European customers, pharmaceutical companies, through our German business. In this regard, we deliver the prescription data we receive from our data suppliers in a variety of products to our customers to assist them in operating their businesses. We deliver this prescription data to our customers in an electronic format. The specific electronic format within which such prescription data is actually delivered to such pharmaceutical companies in Germany is the subject matter of current litigation both before the European Commission and the German courts with IMS Health.

In the proceedings before the European Commission instituted by us on December 19, 2000, we are alleging that to the extent, and only to the extent, this format is copyrighted by IMS Health, the format constitutes an industry standard and an essential facility to competition and must be made available to competitors of IMS Health. We obtained a ruling from the European Commission ordering IMS Health to license its structure for organizing pharmaceutical sales data to us. However, subsequent to this decision, the Court of First Instance and later the European Court Of Justice (“ECJ”) stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding.

In proceedings before the German courts instituted by IMS Health on December 21, 2000, IMS Health has alleged copyright infringement against each of Pharma Intranet Information AG, or PI, the company from whom we purchased certain assets of our German business, and us, and we each have contested the validity of IMS Health’s alleged copyright. In these proceedings, IMS Health obtained an injunction from the Frankfurt Regional Court to prevent each of PI and us from distributing data in the contested format. On August 13, 2002, the Frankfurt Court of Appeals ruled in our favor by dismissing the preliminary injunction against our use of the industry standard data structure. This decision is final and is not subject to further appeal by IMS Health. On September 17, 2002 the Frankfurt Court of Appeals issued a judgment in the main proceedings against PI. While validating a copyright in the structure, the Court held that IMS Health has no standing to sue to enforce the copyright. The Court also determined that IMS Health does not own the copyright. The Court further denied IMS Health’s claims under the EU Database Directive for protection of the data structure involved. Finally, the Court found that PI breached the German Act Against Unfair Trade Practices (UGW) by reason of identically copying the data structure. We have not sold or used the data structure initially used by PI. We do not own PI and PI is no longer actively conducting business. The case against us remains pending before the Frankfurt Regional Court at this time. On April 29, 2004, and upon referral by the Frankfurt Regional Courts on questions involving interpretations of European Competition laws, the European Court of Justice in Luxembourg found in favor of the Company, finding that if IMS Health holds a valid, enforceable copyright, then the Company should be entitled to a compulsory license from IMS Health to the extent it can demonstrate that it offers “a new product” in circumstances where IMS Health is “capable of eliminating all competition on the relevant market.” This clarification of law has been referred back to the Frankfurt Regional Court and is pending review.

On October 14, 2003, we filed suit in the 96th Judicial District Court, Tarrant County, Texas, against 1-Rex, Inc., FDS, Inc., Healthcare Computer Corporation, Freedom Drug Stores, Inc., Freedom Data Services, Inc. and William Rex Akers (collectively the “Defendants”) for breach of contract, misappropriation of trade secrets, fraud, and negligent misrepresentation, seeking unspecified damages for Defendants’ wrongful conduct. On March 5, 2004, Defendants filed a counterclaim against us, asserting claims for tortious interference with a prospective contract, violations of Section 15.05(b) of the Texas Business and Commerce Code, civil conspiracy, and seeking a declaratory judgment in connection with various claims made by us. Defendants seek over $25 million in damages, plus attorneys’ fees, pre-judgment and post-judgment interest, and punitive damages. We

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

intend to vigorously prosecute our causes of action against the Defendants, have denied all liability and damages sought in the counterclaim, and are vigorously defending the claims asserted against us.

On April 7, 2004, a putative securities class-action, captioned Garfield v. NDCHealth Corporation, et al., was filed in the United States District Court for the Northern District of Georgia against NDCHealth and Messrs. Hoff and Hutto. On September 1, 2004, a second amended complaint was filed. The second amended complaint added Messrs. Miller, Shenk, FitzGibbons and Adrean, as well as Ernst and Young, as defendants. The second amended complaint generally alleges, among other things, that members of a purported class of stockholders who purchased common stock between October 1, 2003 and August 9, 2004 were damaged as a result of (i) improper revenue recognition practices in the Company’s physician business unit; (ii) the failure to timely write-down the Company’s investment in MedUnite; and (iii) the improper capitalization and amortization of costs associated with software development. The second amended complaint alleges that, as a result of such conduct, the Company’s previously issued financial statements were materially false and misleading, thereby causing the prices of the Company’s common stock to be inflated artificially. The second amended complaint asserts violations of Section 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks unspecified monetary damages and other relief. On October 13, 2004, the Company and the individual defendants filed a motion to dismiss the second amended complaint. The motion is fully briefed and the parties are currently awaiting a decision by the court.

On April 28, 2004, a lawsuit was filed against us in the General Court of Justice, Superior Court Division, in the State of North Carolina, County of Forsyth, by Carolina Coupon Clearing, Inc., d/b/a Carolina Services Company, Inc. (“CSC”). This matter was settled by the parties on a confidential basis which settlement did not require either party to pay any funds to the other.

Additionally, we are party to a number of other claims and lawsuits incidental to our business. We believe that the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on our financial position, liquidity or results of operations.

Note 9—Comprehensive (Loss) Income

Comprehensive (loss) income includes unrealized gains and losses which are excluded from the Condensed Consolidated Statements of Operations. The components of comprehensive (loss) income are as follows:


	Three months ended
*(In thousands)*	November 26, 2004			November 28, 2003
				(As Restated)
Net (loss) income	$	(4,769	)	$	7,565
Foreign currency translation adjustment		1,043			5,166
Unrealized holding loss, net of tax		—			4
Pension liability adjustment, net of tax		—			—

Total comprehensive (loss) income	$	(3,726	)	$	12,735

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)


	Six months ended
*(In thousands)*	November 26, 2004			November 28, 2003
				(As Restated)
Net (loss) income	$	(11,734	)	$	14,192
Foreign currency translation adjustment		623			1,285
Unrealized holding loss, net of tax		—			4
Pension liability adjustment, net of tax		—			(712	)

Total comprehensive (loss) income	$	(11,111	)	$	14,769

Note 10—Retirement Benefits

The NDCHealth noncontributory defined benefit pension plan (the “Plan”) covers substantially all of our United States employees who have met the eligibility provisions of the Plan as of May 31, 1998. The defined benefit pension plan was closed to new participants beginning June 1, 1998, and benefit accruals for years of service ceased on July 31, 1998. Additionally, benefit accruals for compensation level increases ceased on June 30, 2003. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974, as amended.

Net periodic pension cost for our pension plan during the first two quarters of fiscal 2005 and 2004 included the following components:


	Three Months Ended						Six Months Ended
*(In thousands)*	November 26 2004			November 28 2003			November 26 2004			November 28 2003
Interest cost on projected benefit obligation	$	483		$	470		$	967		$	940
Expected return on plan assets		(424	)		(359	)		(849	)		(718	)
Recognized actuarial loss		145			184			289			368

Net periodic pension cost	$	204		$	295		$	407		$	590

The expense listed above relates to continuing operations. There were no pension costs related to discontinued operations.

In the first fiscal quarter of 2005, we did not make any pension contributions. In the second quarter, we made a contribution of $0.6 million. We presently anticipate contributing an additional $2.5 million to fund our pension plan during the remainder of our 2005 fiscal year.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 11—Consolidating Financial Data Of Subsidiary Guarantors

In fiscal year 2003, we issued $200 million aggregate principal amount of 10¹/2 % senior subordinated notes due 2012. Our wholly-owned, material subsidiaries, which include NDC Health Information Services (Arizona) Inc., and NDC of Canada, Inc., have fully and unconditionally guaranteed the notes on a joint and several basis.

Presented below is our consolidating financial data, including the combined financial data for our subsidiary guarantors and our subsidiary non-guarantors.


Statement of Operations for the Three months ended November 26, 2004 *(In thousands)*	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Revenue	$	55,877		$	42,043		$	19,487		$	—		$	117,407
Operating Expenses
Cost of Service		25,190			27,513			18,259			—			70,962
Other Operating Expenses		24,318			13,103			1,317			—			38,738

		49,508			40,616			19,576			—			109,700

Operating Income		6,369			1,427			(89	)		—			7,707
Other Income/Expense		(6,086	)		(15	)		(131	)		—			(6,232	)
Income from Continuing Operations		283			1,412			(220	)		—			1,475
Provision for Income Taxes		(56	)		716			(86	)		—			574
Discontinued Operations		—			—			(3,721	)		(1,949	)		(5,670	)

Net (Loss) Income	$	339		$	696		$	(3,855	)	$	(1,949	)	$	(4,769	)



Statement of Operations for the Three months ended November 28, 2003 *(In thousands)* (As Restated)	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Revenue	$	62,691		$	41,091		$	5,456		$	—		$	109,238
Operating Expenses
Cost of Service		23,622			25,525			4,446			—			53,593
Other Operating Expenses		22,244			11,054			874			—			34,172

		45,866			36,579			5,320			—			87,765

Operating Income		16,825			4,512			136			—			21,473
Other Income/Expense		(7,085	)		(56	)		(271	)		(19	)		(7,431	)
Income from Continuing Operations		9,740			4,456			(135	)		(19	)		14,042
Provision for Income Taxes		3,743			1,571			(51	)		(7	)		5,256
Discontinued Operations		—			—			(1,221	)		—			(1,221	)

Net Income	$	5,997		$	2,885		$	(1,305	)	$	(12	)	$	7,565

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)



Statement of Operations for the Six months ended November 26, 2004 *(In thousands)*	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Revenue	$	108,873		$	80,981		$	36,681					$	226,535
Operating Expenses
Cost of Service		49,463			54,072			34,138						137,673
Other Operating Expenses		43,958			26,432			2,514						72,904

		93,421			80,504			36,652			—			210,577

Operating Income		15,452			477			29			—			15,958
Other Income/Expense		(12,409	)		(20	)		(250	)					(12,679	)
Income from Continuing Operations		3,043			457			(221	)		—			3,279
Provision for Income Taxes		1,186			178			(86	)		—			1,278
Discontinued Operations		—			—			(11,786	)		(1,949	)		(13,735	)

Net (Loss) Income	$	1,857		$	279		$	(11,921	)	$	(1,949	)	$	(11,734	)


Statement of Operations for the Three months ended November 28, 2003 *(In thousands)* (As Restated)	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Revenue	$	120,726		$	80,390		$	10,787					$	211,903
Operating Expenses
Cost of Service		45,628			50,623			8,838						105,089
Other Operating Expenses		42,708			22,143			1,763						66,614

		88,336			72,766			10,601			—			171,703

Operating Income		32,390			7,624			186			—			40,200
Other Income/Expense		(14,191	)		973			(423	)		(1,060	)		(14,701	)
Income from Continuing Operations		18,199			8,597			(237	)		(1,060	)		25,499
Provision for Income Taxes		6,778			3,267			(90	)		(403	)		9,552
Discontinued Operations		—			—			(1,755	)		—			(1,755	)

Net Income	$	11,421		$	5,330		$	(1,902	)	$	(657	)	$	14,192

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)


Balance Sheet as of November 26, 2004 *(In thousands)*	*NDCHealth* *Corporation*		*Subsidiary* *Guarantor*			*Subsidiary* *Non-Guarantors*		*Eliminations*			*Consolidated*
ASSETS
Current assets:
Cash and cash equivalents	$	12,418	$	382		$	1,443	$	—		$	14,243
Accounts receivable		42,448		16,027			6,354		—			64,829
Prepaid expenses and other current assets		36,253		12,630			575		(17,008	)		32,450
Total assets from discontinued operations							35,791		8,256			44,047

Total current assets		91,119		29,039			44,163		(8,752	)		155,569

Property, equipment and capital use software, net		112,212		30,548			1,779		—			144,539
Goodwill and intangible assets, net		384,860		36,812			8,980		—			430,652
Investments and other		278,643		683			—		(231,734	)		47,592
Intercompany receivables		71,480		(14,726	)		839		(57,593	)		—

Total Assets	$	938,314	$	82,356		$	55,761	$	(298,079	)	$	778,352

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	42,048	$	126		$	144	$	—		$	42,318
Accounts payable, accrued liabilities and other		82,150		29,823			5,593		—			117,566
Total liabilities from discontinued operations							38,883		(27,292	)		11,591

Total current liabilities		124,198		29,949			44,620		(27,292	)		171,475

Long-term liabilities		299,019		3,168			6,403		(18,702	)		289,888

Total liabilities		423,217		33,117			51,023		(45,994	)		461,363

Minority interest in equity of subsidiaries		—		—			1,556		—			1,556
Stockholders’ equity		515,097		49,239			3,182		(252,085	)		315,433

Total Liabilities and Stockholders’ Equity	$	938,314	$	82,356		$	55,761	$	(298,079	)	$	778,352

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)


Balance Sheet as of May 28, 2004 *(In thousands)* (As Restated)	NDCHealth Corporation		Subsidiary Guarantors			Subsidiary Non-Guarantors			*Eliminations*			*Consolidated*
ASSETS
Current assets:
Cash and cash equivalents	$	24,438	$	727		$	2,452		$	—		$	27,617
Accounts receivable		42,495		20,933			5,682			—			69,110
Prepaid expenses and other current assets		65,193		14,003			413			(13,685	)		65,924
Total assets from discontinued operations		—		—			76,528			(6,069	)		70,459

Total current assets		132,126		35,663			85,075			(19,754	)		233,110

Property, equipment and capital use software, net		108,243		31,512			2,478			—			142,233
Goodwill and intangible assets, net		389,279		37,126			7,784			—			434,189
Investments and other		258,484		—			28			(222,988	)		35,524
Intercompany receivables		79,070		(23,127	)		(6,396	)		(49,547	)		—

Total Assets	$	967,202	$	81,174		$	88,969		$	(292,289	)	$	845,056

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	33,011	$	500		$	145		$	—		$	33,656
Accounts payable, accrued liabilities and other		91,928		38,641			6,517			(247	)		136,839
Total liabilities from discontinued operations		—		—			40,581			(15,820	)		24,761

Total current liabilities		124,939		39,141			47,243			(16,067	)		195,256

Long-term liabilities		317,533		2,881			272			(34	)		320,652

Total liabilities		442,472		42,022			47,515			(16,101	)		515,908

Minority interest in equity of subsidiaries		—		—			1,312			1			1,313
Stockholders’ equity		524,730		39,152			40,142			(276,189	)		327,835

Total Liabilities and Stockholders’ Equity	$	967,202	$	81,174		$	88,969		$	(292,289	)	$	845,056

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)


Statement of Cash Flows for the Six Months Ended November 26, 2004 *(In thousands)*	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Cash flows from operating activities:
Net income (loss)	$	1,857		$	279		$	(11,921	)	$	(1,949	)	$	(11,734	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:		22,032			6,293			14,499			—			42,824
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		(4,917	)		(15,413	)		(17,569	)		19,209			(18,690	)

Net cash provided by operating activities		18,972			(8,841	)		(14,991	)		17,260			12,400
Cash flows from investing activities:		(28,350	)		8,870			(382	)		—			(19,862	)
Cash flows from financing activities:		(2,632	)		(374	)		17,188			(17,260	)		(3,078	)
Cash flows from discontinued operations:		—			—			(2,834	)		—			(2,834	)

Increase (decrease) in cash and cash equivalents		(12,010	)		(345	)		(1,019	)		—			(13,374	)
Cash and cash equivalents, beginning of period		24,438			727			2,452			—			27,617

Cash and cash equivalents, end of period	$	12,428		$	382		$	1,433		$	—		$	14,243


Statement of Cash Flows for the Six Months Ended November 28, 2003 *(In thousands)*	*NDCHealth* *Corporation*			*Subsidiary* *Guarantors*			*Subsidiary* *Non-Guarantors*			*Eliminations*			*Consolidated*
Cash flows from operating activities:
Net income (loss)	$	11,421		$	5,330		$	(1,902	)	$	(657	)	$	14,192
Adjustments to reconcile net income (loss) to cash provided by operating activities:		25,588			6,780			9,690			(7,428	)		34,630
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		11,476			(10,475	)		(6,198	)		9,357			4,160

Net cash provided by operating activities		48,485			1,635			1,590			1,272			52,982
Cash flows from investing activities:		(22,312	)		(2,340	)		(1,186	)					(25,838	)
Cash flows from financing activities:		(2,537	)		(359	)		1,684			(1,272	)		(2,484	)
Cash flows from discontinued operations:								(2,285	)					(2,285	)

Increase (decrease) in cash and cash equivalents		23,636			(1,064	)		(197	)		—			22,375
Cash and cash equivalents, beginning of period		12,698			1,491			961						15,150

Cash and cash equivalents, end of period	$	36,334		$	427		$	764		$	—		$	37,525

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 12—Subsequent Events

SEC Investigation

As disclosed by the Company on January 12, 2005, the Securities and Exchange Commission (the “SEC”) has informed us that its previously disclosed informal inquiry was converted to a formal investigation. The Company is cooperating with the SEC in its investigation. At this time we cannot predict how long the investigation will last or what the results of the investigation will be.

Debt and Equity Update

On February 23, 2005, the Company’s Senior Credit Facility was amended to allow the Company to make an additional borrowing under the Revolving Credit Line of the Senior Credit Facility and to, among other things, revise the Company’s total leverage ratio for the third quarter of fiscal 2005.

The Company’s delay in providing its financial statements to its senior lenders under its Senior Credit Facility and in filing its Quarterly Report on Form 10-Q for the quarter ended November 26, 2004 with the SEC as required by the indenture for its 10½% Senior Subordinated Notes due 2012 constituted defaults under its Senior Credit Facility and Note indenture, respectively. On March 16, 2005, the Company secured conditional waivers from the requisite number of lenders under its Senior Credit Facility and the requisite number of holders of its Notes pursuant to which the senior lenders and Note holders have agreed to waive the defaults under the Senior Credit Facility and the Note indenture provided the Company files its Quarterly Report on Form 10-Q for the quarterly period ended November 26, 2004 and restated financial results on Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 and Quarterly Report on Form 10-Q/A for the quarterly period ended August 27, 2004 and delivers current and amended financial statements to the senior lenders as filed with the SEC. By making such filings, the Company satisfied the condition precedent to these waivers and the waivers became effective. The Company expects to be in compliance with the Senior Credit Facility’s financial covenants for the next twelve months.

On February 3, 2005, the Company announced that it would not pay its regular quarterly dividend of $0.04 for the second fiscal quarter ended November 26, 2004 due to the delay in filing the financial statements for its second fiscal quarter as the payment of dividends by the Company is restricted as long as any default or event of default under its Senior Credit Facility and its 10½ % Senior Subordinated Notes continues.

Sale of Assets

On March 17, 2005, the Company completed the sale of its Canadian pharmacy transaction business and signed a definitive agreement to sell its Canadian pharmacy system assets for a combined $14.5 million. The Company expects to record a loss related to these sales in the amount of approximately $3.5 million. The proceeds from the sale will be used to pay down senior debt.

The Company’s Pharmacy Benefit Services business is a 49.5%-owned subsidiary in which the Company has voting control. The contribution of this business to the Company’s total profit is currently not significant. As part of the Company’s consideration of strategic alternatives for increasing focus and reducing debt outstanding, the Company has entered into a definitive agreement for the sale of its interest to one of the minority partners in this business which includes members of management of this business. This agreement is subject to the satisfaction of certain conditions and there can be no assurance that these conditions will be satisfied. If this transaction is not consummated, the Company’s current plans are to continue its ownership of this business with its current partners.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Strategic Alternatives

On February 24, 2005, the Board of Directors of NDCHealth issued a press release announcing that the independent directors of the Board approved the engagement of The Blackstone Group L.P. to assist the Board in its evaluation of strategic alternatives with the objective of maximizing stockholder value over a reasonable period of time.

ITEM 2—MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. NDCHealth disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although NDCHealth believes that its expectations are based on reasonable assumptions, there can be no assurance that its goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Safe Harbor Statement” in this Item 2.

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our latest Annual Report on Form 10-K/A for the year ended May 28, 2004 and our other filings with the SEC.

The restated financial statements for the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002 are reflected in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 which is being filed concurrently with this Quarterly Report on Form 10-Q for the quarter ended November 26, 2004. In addition, the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 27, 2004 is being filed concurrently with this Quarterly Report and reflects the restated financial statements for the periods covered by that Quarterly Report. Throughout this Quarterly Report on Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

Overview

We operate our business as three fundamental segments: Network Services and Systems, Information Management, and Pharmacy Benefit Services. Network Services and Systems provides electronic connectivity to our NDCHealth Intelligent Network for transaction processing and system solutions throughout the healthcare industry. Information Management provides management information, research and analytic services primarily to pharmaceutical manufacturers. Pharmacy Benefit Services, a consolidated subsidiary of which we maintain a 49% controlling ownership interest, provides pharmacy plan management services to health care third party payers. More information concerning segments can be found in Note 7 of the Notes to Condensed Consolidated Financial Statements.

Results of Operations

Revenue


	Three Months Ended
*(In thousands)*	November 26, 2004		November 28, 2003		Change
Revenue:			(As Restated)		Dollars			Percent
Network Services and Systems	$	60,354	$	66,799	$	(6,445	)	(9.6	)%
Information Management		38,402		37,637		765		2.0	%
Pharmacy Benefit Services		18,651		4,802		13,849		288.4	%

Total	$	117,407	$	109,238	$	8,169		7.5	%


	Six Months Ended
*(In thousands)*	November 26, 2004		November 28, 2003		Change
Revenue:			(As Restated)		Dollars			Percent
Network Services and Systems	$	117,930	$	129,065	$	(11,135	)	(8.6	)%
Information Management		73,722		73,394		328		0.4	%
Pharmacy Benefit Services		34,883		9,444		25,439		269.4	%

Total	$	226,535	$	211,903	$	14,632		6.9	%

Revenue growth in the second quarter and first six months of fiscal year 2005 as compared to the comparable prior year periods was driven by significant growth in Pharmacy Benefit Services, partially offset by a decline in both the Network Services and Systems. The decline in Network Services and Systems segment revenue was primarily caused by lower physician software sales and the transition to next-generation pharmacy systems, which offset growth in pharmacy network services. The Information Management segment generated lower revenue from non-recurring ad hoc research and analytic services and was impacted by price compression from certain pharmaceutical manufacturer customers renewed over the last year.

Network Services and Systems

Network Services and Systems revenue decreased $6.4 million, or 9.6%, to $60.4 million in the second quarter of fiscal 2005 from $66.8 million in the second quarter of fiscal 2004. Network Services and Systems revenue decreased $11.1 million, or 8.6%, to $117.9 million in the first six months of fiscal 2005 from $129.1 million in the first six months of fiscal 2004. The decrease in revenue is detailed below by our major customer groups.

Revenue by Customer Group


	Three Months Ended
	November 26, 2004		November 28, 2003		Change
*(In thousands)*			(As Restated)		Dollars			Percent
Pharmacy	$	35,670	$	36,155	$	(485	)	(1.3	)%
Hospital		13,371		15,099		(1,728	)	(11.4	)%
Physician		8,011		11,967		(3,956	)	(33.1	)%
Other		3,302		3,578		(276	)	(7.7	)%

Total	$	60,354	$	66,799	$	(6,445	)	(9.6	)%


	Six Months Ended
	November 26, 2004		November 28, 2003		Change
(In thousands)			(As Restated)		Dollars			Percent
Pharmacy	$	69,652	$	70,403	$	(751	)	(1.1	)%
Hospital		27,223		29,765		(2,542	)	(8.5	)%
Physician		14,279		21,407		(7,128	)	(33.3	)%
Other		6,776		7,490		(714	)	(9.5	)%

Total	$	117,930	$	129,065	$	(11,135	)	(8.6	)%

Revenue from Pharmacy customers declined $0.5 million, or 1.3%, to $35.7 million in the second quarter of fiscal 2005 from $36.2 million in the second quarter of fiscal 2004. Revenue from Pharmacy customers declined $0.8 million, or 1.1%, to $69.7 million in the first six months of fiscal 2005 from $70.4 million in the first six months of fiscal 2004. This decline was due to lower information product sales as well as lower pharmacy systems revenue as new NDC PharmacyRx^™ system sales and the transition to recurring, transaction-based revenue do not yet offset a decrease in legacy systems sales. This decrease was offset by the overall revenue growth of approximately 10% in our pharmacy transaction business, which was attributed to increases of 10% in network transactions and 22% in pre and post edit transactions. Transaction revenue growth lagged the growth in transactions due to the transaction growth being derived primarily from the largest pharmacy chains, who receive our best per-transaction pricing due to their large volumes. Transaction-based revenue is expected to continue to grow more slowly than transactions due to market share gains by large national chains and competitive price pressure for transaction-based services.

Revenue from Hospital customers declined $1.7 million, or 11.4%, to $13.4 million in the second quarter of fiscal 2005 from $15.1 million in the second quarter of fiscal 2004. Revenue from Hospital customers declined $2.5 million, or 8.5%, to $27.2 million in the first six months of fiscal 2005 from $29.8 million in the first six months of fiscal 2004 as transaction revenue growth from NDC ePREMIS^™ continued to be offset by a lower level of customization and professional services fees.

Revenue from the Physician customer group decreased $4.0 million, or 33.1%, to $8.0 million in the second quarter of fiscal 2005 from $12.0 million in the second quarter of fiscal 2004. Revenue from the Physician customer group decreased $7.1 million, or 33.3%, to $14.3 million in the first six months of fiscal 2005 from $21.4 million in the first six months of fiscal 2004. The decrease in both periods was due to our change in selling software to value added resellers (“VARs”) on a cash basis instead of granting credit terms, which led to significantly fewer system sales in the second quarter and first six months of fiscal 2005 compared to the second quarter and first six months of fiscal 2004. During the fourth quarter of fiscal 2004, we changed our agreements with our VARs and eliminated the requirement to maintain evidence of contract support and advertising support. Therefore, we have ceased recording items in revenue and expenses that were recognized in accordance with EITF 01-9. This change contributed $2.4 million and $4.1 million to the three and six-month revenue declines, respectively. We expect physician system sales to continue its recovery in the third quarter of fiscal 2005 following the release of a second product upgrade as VARs purchase software with new HIPAA security functionality.

Other revenue, which includes data processing services provided to our former affiliate Global Payments, Inc. and a third-party paper claims and statement printing service, decreased $0.3 million, or 7.7%, to $3.3 million in the second quarter of fiscal 2005 from $3.6 million in the second quarter of fiscal 2004. Other revenue decreased $0.7 million, or 9.5%, to $6.8 million in the first six months of fiscal 2005 from $7.5 million in the first six months of fiscal 2004. As previously disclosed, Global Payments is expected to discontinue the service agreement on or after September 30, 2005, eliminating a portion of the other revenue stream.

Information Management

Information Management Revenue increased $0.8 million, or 2.0%, to $38.4 million in the second quarter of fiscal 2005 from $37.6 million in the second quarter of fiscal 2004. Information Management Revenue increased $0.3 million, or 0.4%, to $73.7 million in the first six months of fiscal 2005 from $73.4 million in the first six months of fiscal 2004. The increase in both periods was a result of growth in new product revenue, such as the Intelligent Health Repository services and other emerging products, offset by declines in certain legacy product offerings and compression from certain of our pharmaceutical manufacturer customers. The Information Management business is expected to face continued pricing pressure from its pharmaceutical customers and will need to continue to develop and sell new, more advanced information products in order to grow revenue in the future.

Pharmacy Benefit Services

Pharmacy Benefit Services Revenue increased $13.8 million, or 288.4%, to $18.7 million in the second quarter of fiscal 2005 from $4.8 million in the second quarter of fiscal 2004. Pharmacy Benefit Services Revenue increased $25.4 million, or 269.4%, to $34.9 million in the first six months of fiscal 2005 from $9.4 million in the first six months of fiscal 2004. The increase was due to the rapid expansion of the administrative services component, and comprised 15.9% of total company revenue in the second quarter of fiscal 2005 and 15.4% of total company revenue in the first six months of fiscal 2005. Because a majority of the revenue in the Pharmacy Benefit Services segment includes the underlying cost of the prescription drug being administered on behalf of customers, margins are low and reported revenue growth in the segment did not contribute notably to profits.

Cost of Service

Cost of Service (“COS”) includes certain compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. COS increased $17.4 million, or 32.4%, to $71.0 million in the second quarter of fiscal 2005 from $53.6 million in the second quarter of fiscal 2004. COS increased $32.6 million, or 31.0%, to $137.7 million in the first six months of fiscal 2005 from $105.1 million in the first six months of fiscal 2004. The increase was due primarily to variable costs directly related to increased Revenue in our Pharmacy Benefit Services segment, as well as increased software development and customer implementation expenses in the network services and systems segment and increased data costs in the Information Management segment.


	Three Months Ended
*(In thousands)*	November 26, 2004			November 28, 2003			Change
Revenue by Segment				(As Restated)			Dollars			Percent
Network Services and Systems	$	60,354		$	66,799		$	(6,445	)	(9.6	)%
Information Management		38,402			37,637			765		2.0	%
Pharmacy Benefit Services		18,651			4,802			13,849		288.4	%

Total Revenue	$	117,407		$	109,238		$	8,169		7.5	%

Cost of Service by Segment
Network Services and Systems	$	32,788		$	30,112		$	2,676		8.9	%
Information Management		20,766			19,828			938		4.7	%
Pharmacy Benefit Services		17,408			3,653			13,755		376.5	%

Total Cost of Service	$	70,962		$	53,593		$	17,369		32.4	%

Cost of Service as Percent of Revenue
Network Services and Systems		54.3	%		45.1	%
Information Management		54.1	%		52.7	%
Pharmacy Benefit Services		93.3	%		76.1	%
Total		60.4	%		49.1	%


	Six Months Ended
*(In thousands)*	November 26, 2004			November 28, 2003			Change
Revenue by Segment				(As Restated)			Dollars			Percent
Network Services and Systems	$	117,930		$	129,065		$	(11,135	)	(8.6	)%
Information Management		73,722			73,394			328		0.4	%
Pharmacy Benefit Services		34,883			9,444			25,439		269.4	%

Total Revenue	$	226,535		$	211,903		$	14,632		6.9	%

Cost of Service by Segment
Network Services and Systems	$	64,044		$	58,113		$	5,931		10.2	%
Information Management		41,158			39,638			1,520		3.8	%
Pharmacy Benefit Services		32,471			7,338			25,133		342.5	%

Total Cost of Service	$	137,673		$	105,089		$	32,584		31.0	%

Cost of Service as Percent of Revenue
Network Services and Systems		54.3	%		45.0	%
Information Management		55.8	%		54.0	%
Pharmacy Benefit Services		93.1	%		77.7	%
Total		60.8	%		49.6	%

COS in the Network Services and Systems segment increased by $2.7 million, or 8.9%, to $32.8 million in the second quarter of fiscal 2005 from $30.1 million in the second quarter of fiscal 2004. COS in the Network Services and Systems segment increased by $5.9 million or, 10.2%, to $64.0 million in the first six months of fiscal 2005 from $58.1 million in the first six months of fiscal 2004. This increase is primarily due to higher staffing related product development expense and a larger percentage of our software development costs being expensed particularly as we develop subsequent releases of our NDC EnterpriseRx^TM system prior to establishing technological feasibility for those releases which would allow for capitalization of the development costs.

COS in the Information Management segment increased $0.9 million, or 4.7%, to $20.8 million in the second quarter of fiscal 2005 from $19.8 million in the second quarter of fiscal 2004 due to increased data costs discussed below, costs related to the development of Intelligent Health Repository products and ongoing costs associated with the integration of Arclight data into Information Management products. COS in the Information Management segment increased $1.5 million, or 3.8%, to $41.2 million in the first six months of fiscal 2005 from $39.6 million in the first six months of fiscal 2004 due to increased data costs discussed below, costs related to the development of Intelligent Health Repository products and ongoing costs associated with the integration of Arclight data into Information Management products partially offset by lower staffing levels.

COS in the Pharmacy Benefit Services segment increased $13.8 million, or 376.5%, to $17.4 million in the second quarter of fiscal 2005 from $3.7 million in the second quarter of fiscal 2004 due to substantial Revenue growth. COS in the Pharmacy Benefit Services segment increased $25.4 million, or 269.4%, to $34.9 million in the first six months of fiscal 2005 from $9.4 million in the first six months of fiscal 2004. COS as a percent of Revenue increased to 93.3% in the second quarter of fiscal 2005 from 76.1% in the second quarter of fiscal 2004, and increased to 93.1% in the first six months of fiscal 2005 from 77.7% in the first six months of fiscal 2004 as the mix of services sold shifted to pharmacy benefit administrative services, for which Revenue and COS both include the underlying cost of the prescription drug being administered on behalf of customers, thereby providing very low contribution margins. The segment’s traditional pharmacy claim adjudication services offer higher percent margins, but represent a declining portion of this segment’s Revenue.

Data Costs

Data costs are primarily recorded within the Information Management segment in COS, but some data costs are also recorded in Network Services and Systems segment COS. Data costs increased $1.4 million, or 10.8%, to $14.4 million in the second quarter of fiscal 2005 from $13.0 million in the second quarter of fiscal 2004. Data costs increased $2.9 million, or 11.2%, to $28.8 million in the first six months of fiscal 2005 from $25.9 million in the first six months of fiscal 2004. The increases in both periods were due to an increase in volume of data purchased and an increase in the costs of such data. As a percent of Revenue, data costs increased from the second quarter of fiscal 2004 to the second quarter of fiscal 2005, and increased from the first six months of fiscal 2004 to the first six months of fiscal 2005. We are continuing to actively pursue programs to contain data costs.


	Three Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent
Revenue	$	117,407		$	109,238		$	8,169	7.5	%
Data costs	$	14,436		$	13,034		$	1,402	10.8	%
Data costs as a Percent of Revenue		12.3	%		11.9	%

	Six Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent
Revenue	$	226,535		$	211,903		$	14,632	6.9	%
Data costs	$	28,840		$	25,945		$	2,895	11.2	%
Data costs as a Percent of Revenue		12.7	%		12.2	%

Software Costs

Software costs are related to the development of new products and maintenance and enhancement of existing products. We capitalize certain costs of developing software held for sale to our customers as well as software used internally to provide services to our customers. We expense costs associated with maintenance of existing products and costs associated with developing products prior to the products reaching technological feasibility.

The primary engine of growth for NDCHealth is the creation of new and enhanced products. As such, software costs are an investment in the growth of the Company. As new products are developed, sold and installed, we expect to grow revenue, operating income, and increase cash flow. Our current focus is on developing products such as NDC EnterpriseRx^™, NDC MailRx^™, and our Intelligent Health Repository and ArcLight-related information products.

Total costs associated with software development increased by $0.1 million, or 1.6%, to $10.9 million in the second quarter of fiscal 2005 from $10.8 million in the second quarter of fiscal 2004. Of the total, costs associated with software development for our new pharmacy system, EnterpriseRx, were $4.7 million in the second quarter of fiscal 2005 versus $5.0 million in the second quarter of fiscal 2004. In the second quarter of fiscal 2005, approximately $2.9 million of these development costs were capitalized, resulting in net development expense associated with our new pharmacy system of approximately $1.8 million. In the second quarter of fiscal 2004, approximately $4.1 million of these development costs were capitalized resulting in net development expense associated with our new pharmacy system of approximately $0.9 million.

Total costs associated with software development increased by $0.3 million, or 1.6%, to $21.3 million for the six months of fiscal 2005 from $21.0 million for the six months of fiscal 2004. Of the total, costs associated with software development for our new pharmacy system were $9.6 million for the six months of fiscal 2005

versus $9.5 million for the six months of fiscal 2004. For the six months of fiscal 2005, approximately $6.1 million of these development costs were capitalized, resulting in net development expense associated with our new pharmacy system of approximately $3.5 million. For the six months of fiscal 2004, approximately $7.5 million of these development costs were capitalized resulting in net development expense associated with our new pharmacy system of approximately $2.0 million.

As of November 26, 2004 we have capitalized $45 million for NDC EnterpriseRx^TM in the aggregate. NDC EnterpriseRx^TM must achieve anticipated market acceptance over the next few years in order for future cash flows to support this asset. Failure to achieve anticipated market acceptance could lead to a write down of the software asset.

As discussed above, development costs capitalized as a percent of total development costs decreased to 54.3% in the second quarter of fiscal 2005 from 76.4% in the second quarter of fiscal 2004 as a result of the initial release of our EnterpriseRx system approaching completion and the initiation of design work for subsequent releases.


	Three Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent

Total costs associated with software development	$	10,908		$	10,838		$	70	0.6	%
Less: capitalization of internally developed software		(6,095	)		(8,257	)		2,162	26.2	%

Net software development expense		4,813			2,581			2,232	86.5	%
Software maintenance expense		2,744			2,112			632	29.9	%

Total net software expense	$	7,557		$	4,693		$	2,864	61.0	%

Revenue	$	117,407		$	109,238		$	8,169	7.5	%
Capitalization as a % of Revenue		5.2	%		7.6	%
Total net software expense as a % of Revenue		6.4	%		4.3	%
Capitalization of developed software as a % of total costs associated with software development		55.9	%		76.2	%


	Six Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent
Total costs associated with software development	$	21,256		$	20,931		$	325	1.6	%
Less: capitalization of internally developed software		(11,902	)		(15,461	)		3,559	23.0	%

Net software development expense		9,354			5,470			3,884	71.0	%
Software maintenance expense		4,975			4,118			857	20.8	%

Total net software expense	$	14,329		$	9,588		$	4,741	49.4	%

Revenue	$	226,535		$	211,903		$	14,632	6.9	%
Capitalization as a % of Revenue		5.3	%		7.3	%
Total net software expense as a % of Revenue		6.3	%		4.5	%
Capitalization of developed software as a % of total costs associated with software development		56.0	%		73.9	%

Sales, General and Administrative Expense


	Three Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent
Revenue	$	117,407		$	109,238		$	8,169	7.5	%
SG&A	$	26,123		$	23,618		$	2,505	10.6	%
SG&A as a Percent of Revenue		22.2	%		21.6	%

	Six Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars		Percent
Revenue	$	226,535		$	211,903		$	14,632	6.9	%
SG&A	$	49,852		$	45,920		$	3,932	8.6	%
SG&A as a Percent of Revenue		22.0	%		21.7	%

Sales, General and Administrative (“SG&A”) expense consists primarily of salaries, wages and expenses relating to sales, marketing, administrative and management employees, employee training costs, occupancy of leased space, insurance costs and outside professional fees, particularly for legal and audit services. Corporate expenses not attributable to a specific segment are allocated to the Network Services and Systems and Information Management segments on a weighted relative basis based on Revenue. We do not allocate corporate costs to our minority owned Pharmacy Benefit Services segment.

The increase in SG&A expense in both absolute dollars and as a percent of Revenue was caused by increased corporate staff and professional fees in response to increased complexity and regulatory requirements of our business including expenses related to Sarbanes-Oxley compliance, higher audit and insurance expenses, increased legal fees as a result of shareholder litigation and expenses related to the SEC investigation and professional fees associated with the Board of Directors evaluation of strategic alternatives to maximize shareholder value.

We expect that SG&A expense as a percentage of Revenue will increase in fiscal 2005 due to continued investment in our sales and marketing programs to support the roll out of new products, increased professional fees associated with litigation resulting from shareholder lawsuits and increased corporate governance expenses related to Sarbanes-Oxley compliance and expenses related to the SEC investigation.

Depreciation and Amortization


	Three Months Ended
	November 26, 2004		November 28, 2003		Change
*(In thousands)*			(As Restated)		Dollars			Percent
Network Services and Systems	$	7,032	$	5,875	$	1,157		19.7	%
Information Management		3,250		2,763		487		17.6	%
Pharmacy Benefit Services		117		118		(1	)	(0.8	)%

Total Depreciation and Amortization	$	10,399	$	8,756	$	1,643		18.8	%


	Six Months Ended
	November 26, 2004		November 28, 2003		Change
			(As Restated)		Dollars		Percent
*(In thousands)*
Network Services and Systems	$	13,959	$	11,600	$	2,359	20.3	%
Information Management		6,648		5,570		1,078	19.4	%
Pharmacy Benefit Services		229		227		2	0.9	%

Total Depreciation and Amortization	$	20,836	$	17,397	$	3,439	19.8	%

Depreciation and Amortization expense increased in the second quarter of fiscal 2005 from the second quarter of fiscal 2004, and increased in the first six months of fiscal 2005 from the first six months of fiscal 2004 as a result of new products being placed into service and the amortization of intangible acquired assets.

Following the general availability of EnterpriseRx, currently anticipated in the first or second quarter of fiscal 2006, Depreciation and Amortization will increase by approximately $2.6 million per quarter or $10.4 million per year due to the amortization of this asset.

When material intangible assets, such as goodwill and customer bases, are acquired in conjunction with the purchase of a company, NDCHealth undertakes a study by an independent third party to determine the allocation of the purchase price to the assets acquired. Intangible assets are amortized over their estimated useful life ranging from 3 to 10 years. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill. We do, however, assess the recoverability of goodwill on at least an annual basis during our second quarter, or more frequently if circumstances suggest potential impairment. We completed our annual impairment testing during the second quarter of fiscal 2005. For each of our reporting units, we found that the estimated fair value exceeded the net book value of the unit and therefore impairment was not necessary.

However, the amount by which the estimated fair value exceeded the net book value was less than in previous years due to declines in operating earnings of our Pharmacy and Physician reporting units. If earnings do not recover as expected in each of these reporting units, we may face a write-down of goodwill in the future. To achieve the expected recovery in our Pharmacy unit, we must successfully introduce our EnterpriseRx pharmacy system and achieve reasonable market acceptance and sales, and we must continue to grow pharmacy network services revenue from transaction growth, added penetration of value-added pre and post editing services, and further success in selling informatics services to pharmacy customers. To achieve the expected recovery in our Physician unit operating earnings, we must see continued recovery in Physician system sales to our value-added reseller channel, which declined following our conversion to offering only cash terms to our resellers at the end of our fiscal year 2004 but which showed improvement in our fiscal second quarter.

Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. An evaluation of the company’s strategic alternatives is being conducted by the company’s Board of Directors and management, including a reexamination of the strategies and prospects of each line of business, which could lead to a reevaluation of our goodwill fair values before the next annual test of goodwill.

Goodwill by business is shown below:


*(In thousands)*	Goodwill as of November 26, 2004
Business
Hospital	$	49,582
Pharmacy		231,814
Physician		43,210
Information Management		39,223

Total Goodwill	$	363,829

There is a risk of impairment of goodwill in our Pharmacy business if our EnterpriseRx system does not achieve market acceptance, or if legacy systems products decline faster than expected.

Restructuring and Other Charges

In the first six months of fiscal year 2004, with the completion of the TechRx acquisition, we began a review of NDCHealth to identify opportunities for increased operational efficiencies. Consequently, during the first six months of fiscal 2004, we recorded charges of $3.0 million for severance related costs, $0.1 million related to lease terminations, and $0.2 million related to impairment of a note receivable we received as partial payment for the sale of a non-core operation.

During the second quarter of fiscal 2005, in an effort to reduce costs and consolidate certain senior management positions within the organization, we terminated five positions. Eliminations of these positions will allow the company to better align its resources with key opportunities and bring decision making closer to the customers. Of the $2.2 million incurred the second quarter of fiscal 2005, $1.9 million was cash and $0.3 million was a non-cash charge in accordance with FASB Interpretation Number 44, “Accounting for Certain Transactions Involving Stock Compensation”.


	Three Months Ended
*(In thousands)*	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	1,415
Exit-related costs		—		32
Asset reserves		—		187
Acquisition related costs		—		164

Total	$	2,216	$	1,798

By Segment:
Network Services and Systems	$	911	$	757
Information Management		433		58
Other		872		983

Total	$	2,216	$	1,798


	Six Months Ended
	November 26, 2004		November 28, 2003
*(In thousands)*			(As Restated)
By Expense Type:
Severance	$	2,216	$	2,698
Exit-related costs		—		147
Asset reserves		—		187
Acquisition related costs		—		265

Total	$	2,216	$	3,297

By Segment:
Network Services and Systems	$	911	$	1,426
Information Management		433		613
Other		872		1,258

Total	$	2,216	$	3,297

Operating Income


	Three Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars			Percent
Operating Income:
Network Services and Systems	$	3,463		$	14,550		$	(11,087	)	(76.2	)%
Information Management		4,847			7,375			(2,528	)	(34.3	)%
Pharmacy Benefit Services		269			531			(262	)	(49.3	)%
Other		(872	)		(983	)		111		11.3	%

Total Operating Income	$	7,707		$	21,473		$	(13,766	)	(64.1	)%


	Six Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars			Percent
Operating Income:
Network Services and Systems	$	8,792		$	28,095		$	(19,303	)	(68.7	)%
Information Management		7,551			12,532			(4,981	)	(39.7	)%
Pharmacy Benefit Services		487			831			(344	)	(41.4	)%
Other		(872	)		(1,258	)		386		30.7	%

Total Operating Income	$	15,958		$	40,200		$	(24,242	)	(60.3	)%

Operating Income in the Network Services and Systems segment decreased $11.1 million, or 76.2%, to $3.5 million in the second quarter of fiscal 2005 from $14.6 million in the second quarter of fiscal 2004. Operating Income in the Network Services and Systems segment decreased $19.3 million, or 68.7%, to $8.8 million in the first six months of fiscal 2005 from $28.1 million in the first six months of fiscal 2004. The decrease in both periods was due to decreased Revenue, increases in COS, and increased Depreciation and Amortization discussed earlier.

Operating Income in the Information Management segment decreased $2.5 million, or 34.3%, to $4.8 million in the second quarter of fiscal 2005 from $7.4 million in the second quarter of fiscal 2004. Operating Income in the Information Management segment decreased $5.0 million, or 39.7%, to $7.6 million in the first six

months of fiscal 2005 from $12.5 million in the first six months of fiscal 2004. The decrease in both periods was due to decreased Revenue, increased data costs, increased SG&A, and increased Depreciation and Amortization discussed earlier.

Operating Income in the Pharmacy Benefit Services segment decreased $0.3 million, or 49.3%, to $0.3 million in the second quarter of fiscal 2005 from $0.5 million in the second quarter of fiscal 2004. Operating Income in the Pharmacy Benefit Services segment decreased $0.3 million, or 41.4%, to $0.5 million in the first six months of fiscal 2005 from $0.8 million in the first six months of fiscal 2004. The decrease in both periods was due to increased COS and SG&A expenses, reflecting expenses to add certain capabilities needed to continue to grow and to begin achieving economies of scale.

Operating Income in Other in the second quarter and first six months of fiscal 2004 and fiscal 2005 was related to Restructuring and Other Charges mentioned above that are not attributable to a specific segment.

Other Income (Expense)


	Three Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars			Percent
Other Income (Expense)
Interest and Other Income	$	78		$	155		$	(77	)	(49.7	%)
Interest and Other Expense		(6,175	)		(7,319	)		1,144		15.6	%
Minority Interest in Earnings		(135	)		(267	)		132		49.4	%

Total	$	(6,232	)	$	(7,431	)	$	1,199		16.1	%


	Six Months Ended
	November 26, 2004			November 28, 2003			Change
*(In thousands)*				(As Restated)			Dollars			Percent
Other Income (Expense)
Interest and Other Income	$	143		$	257		$	(114	)	(44.4	%)
Interest and Other Expense		(12,579	)		(14,540	)		1,961		13.5	%
Minority Interest in Earnings		(243	)		(418	)		175		41.9	%

Total	$	(12,679	)	$	(14,701	)	$	2,022		13.8	%

Interest and Other Income results primarily from interest earned in overnight money market funds.

Interest and Other Expense consists of interest expense, amortization of debt issuance costs and other miscellaneous non-operating expense. Interest and Other Expense decreased $1.1 million, or 15.6%, to $6.2 million in the second quarter of fiscal 2005 from $7.3 million in the second quarter of fiscal 2004. Interest and Other Expense decreased $2.0 million, or 13.5%, to $12.6 million in the first six months of fiscal 2005 from $14.5 million in the first six months of fiscal 2004. The decrease in both periods was due to lower interest expense as a result of lower interest rates as negotiated in December 2003 and a reduction in the balance owed under our term loan and revolving credit agreement.

Minority Interest in Earnings results from our 49% controlling interest in our consolidated subsidiary engaged in providing Pharmacy Benefit Services and is driven by their profitability. When this subsidiary is profitable, we are required to share the profits and record a charge. When this subsidiary is not profitable, we share in the loss and record a benefit.

Provision for Income Taxes

Our estimated continuing effective tax rate in the first six months of fiscal years 2005 and 2004 was 39.0% and 37.5%, respectively. The tax rate for the first six months of fiscal 2005 was higher than the first six months of fiscal 2004 due to our permanent book to tax differences being a larger percentage of our total tax expense because of lower income.

The Internal Revenue Service (“IRS”) is currently auditing our fiscal year 2001 consolidated federal income tax return. The primary issue is a worthless stock loss deduction claimed as a result of the divestiture of the management services business (“PHSS”). This deduction created a net operating loss which was used to offset most of the tax liability for fiscal years 2002 and 2003. In fiscal year 2001, we provided a tax contingency reserve of approximately 50% of the $25.0 million tax benefit claimed for the worthless stock loss deduction. We believe that our current reserve of the ultimate settlement of this issue is properly stated as of November 26, 2004. However, if the worthless stock loss and certain other issues are settled in the IRS’ favor, we estimate that we would incur an incremental tax expense of $12.8 million and would have to pay approximately $8.0 million of additional cash taxes, excluding interest and penalties. This expense, if incurred, would be reflected in the results from Discontinued Operations as PHSS was treated as a Discontinued Operation beginning in Fiscal 2000. We are unable to predict the timing of the completion of this audit.

Discontinued Operations

During the fourth fiscal quarter of 2004, NDCHealth’s management performed a review of our European businesses to determine alternatives to mitigate losses associated with these operations. As a result of this review, our board of directors authorized the disposition of our European businesses. Accordingly, our financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of these operations displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation.

The operating results of our Discontinued Operations are summarized as follows:


	Three months ended
	November 26, 2004			November 28, 2003
*(In thousands, except per share data)*				(As Restated)
Revenue	$	4,935		$	4,811
Operating Income / (Loss)	$	304		$	(2,058	)

Income / (Loss) from Operations, net of Tax	$	(15	)	$	(1,221	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(7,357	)	$	—

Income / (Loss) from Discontinued Operations	$	(5,670	)	$	(1,221	)


Diluted Earnings / (Loss) per Share:
From Operations	$	—		$	(0.03	)

Gain on Sale of UK Businesses	$	0.05		$	—

From Asset Valuation Adjustment	$	(0.20	)	$	—

Total	$	(0.16	)	$	(0.03	)



	Six months ended
	November 26, 2004			November 28, 2003
*(In thousands, except per share data)*				(As Restated)
Revenue	$	10,221		$	10,061
Operating Loss	$	(253	)	$	(2,400	)
Loss from Operations, net of Tax	$	(472	)	$	(1,755	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(14,965	)	$	—

Loss from Discontinued Operations	$	(13,735	)	$	(1,755	)

Diluted Earnings / (Loss) per Share:
From Operations	$	(0.01	)	$	(0.05	)

Gain on Sale of UK Businesses	$	0.05		$	—

From Asset Valuation Adjustment	$	(0.42	)	$	—

Total	$	(0.38	)	$	(0.05	)

The Net Loss from Discontinued Operations for the three months ended November 28, 2003 is net of a tax benefit of $0.6 million. The Net Loss from Discontinued Operations for the six months ended November 26, 2004 and November 28, 2003 is net of a tax benefit of approximately $0.1 million and $0.7 million, respectively.

Liquidity and Capital Resources

Payments from our customers are our greatest source of liquidity. Additional sources of liquidity include our credit facility, financing under capital lease arrangements, vendor financing, and issuances of common stock and other instruments. The cash provided by these sources has a variety of uses. Most importantly, we must pay our employees and vendors for the services and materials they supply. Additional uses include capital equipment, development of additional products, investments in alliances, acquisitions, payment of taxes, payment of dividends, extension of credit to our customers, repayment of debt, and other general funding of our day-to-day operations.

Cash needed or cash that we generate after satisfying all of our continuing operating requirements is shown on our statement of cash flows as net cash used in or provided by operating activities, respectively. This measure takes into account items such as non-cash expenses included in our operating income, cash used to extend credit to our customers, and cash provided by our vendors extending credit to us.

Net cash provided by operating activities was $12.4 million in the first six months of fiscal 2005, a $40.6 million decrease from the $53.0 million of cash provided by operating activities in the first six months of fiscal 2004.

Net cash provided by operating activities was negatively impacted by a reduction in the income from continuing operations adjusted for non-cash items and an increase in use of working capital. We used $18.7 million of working capital in the first six months of fiscal 2005 compared to providing $4.2 million in the first six months of fiscal 2004. Significant differences between the first six months of fiscal 2005 and the first six months of fiscal 2004 are accounts receivable, accounts payable and accrued liabilities, prepaid expenses and other assets, and deferred revenue. Collectively, these changes in working capital used $18.5 million of cash in the first six months of fiscal 2005 and provided $4.4 million of cash in the first six months of fiscal 2004. Changes in working capital are the result of the timing of payments to our vendors and the timing difference between billing customers for services as required by their contracts and our recognition of related revenue. Accounts receivable used $1.0 million of cash in the first six months of fiscal 2005 and used $8.9 million of cash in the first six months of fiscal 2004. Accounts payable and accrued liabilities used $9.2 million of cash in the first six months of fiscal 2005 compared to providing $7.9 million in the first six months of fiscal 2004. During fiscal 2005, we have made an effort to improve the working relationship with our vendors and we have reduced the number of days our payables remain outstanding. Prepaid expenses and other assets provided $7.3 million of cash in the first six months of fiscal 2005 and provided $1.0 million of cash in the first six months of fiscal 2004. Deferred revenue used $15.5 million in the first six months of fiscal 2005 compared to providing $4.4 million in the first six months of fiscal 2004.

The nature of an information services business is such that it requires a substantial continuing investment in data, technology equipment and product development in order to expand the business. Creation of new and enhanced products is the engine of growth for NDCHealth and we continue to invest in our future growth through focus on product development. Historically we have also expanded our business through acquisitions and strategic investments in other businesses. The cash we use to expand our business is shown as net cash used in investing activities. Capital expenditures, which reflect our investment in equipment and product development such as capitalized software costs discussed above, were $18.0 million in the first six months of fiscal 2005, including $11.9 million in capitalized software costs and $1.7 million in capitalized interest; and $21.6 million in the first six months of fiscal 2004, including $15.5 million in capitalized software costs and $1.4 million in capitalized interest. As we continue the launch of new products in fiscal 2005, we expect a similar level of capital expenditures as in 2004.

We used $2.4 million of cash in the first six months of fiscal 2005 for payment of the annual premium of a Supplemental Executive Retirement Plan (“SERP”) for certain executives, all of whom are either retired or no longer with the Company, and for payment of other miscellaneous investments. During the first six months of fiscal 2004 we used $6.3 million of cash for other investing activities, primarily the payment of transaction costs related to the completion of our acquisition of TechRx at the end of fiscal 2003 as well as payment of the annual SERP premium discussed above.

We currently have in place a $225 million senior credit facility, consisting of a $100 million five-year revolving credit facility and a $125 million six-year term loan, and have $200 million in 10½% senior subordinated notes due 2012 outstanding. As of November 26, 2004, the fair market value of the notes was approximately $213.3 million.

as required by the indenture for its 10½% Senior Subordinated Notes due 2012 constituted defaults under its Senior Credit Facility and Note indenture, respectively. On March 16, 2005, the Company secured conditional waivers from the requisite number of lenders under its Senior Credit Facility and the requisite number of holders of its Notes pursuant to which the senior lenders and Note holders have agreed to waive the defaults under the Senior Credit Facility and the Note indenture provided the Company files its Quarterly Report on Form 10-Q for the quarterly period ended November 26, 2004 and restated financial results on Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 and Quarterly Report on Form 10-Q/A for the quarterly period ended August 27, 2004 and delivers current and amended financial statements to the senior lenders as filed with the SEC. By making such filings, the Company satisfied the condition precedent to these waivers and the waivers became effective. The Company expects to be in compliance with the Senior Credit Facility’s financial covenants for the next twelve months.

Mandatory prepayments are required after 90 days following the end of each fiscal year beginning with fiscal year 2004. NDCHealth is obligated to prepay an aggregate principal amount of the loans, and cash collateralize any Letter of Credit obligations in an amount equal to: (i) 75% of excess cash flow for such fiscal year if the consolidated total leverage ratio is greater than 2.00:1.00 at the end of such fiscal year, and (ii) 50% of such excess cash flow for such fiscal year if the consolidated total leverage ratio is less than or equal to 2.00:1.00 at the end of the fiscal year. Each such prepayment shall be applied first to the term facility pro rata to the scheduled amortization payments until all are paid in full and second to the revolving credit facility. Under the mandatory prepayment agreement, a $28.0 million prepayment of the term loan was made on August 26, 2004. As of November 26, 2004, $63.3 million was outstanding on the term loan and there was $38.5 million outstanding under the revolving credit facility. Proceeds from the sale of our United Kingdom operations were used to pay down $8.3 million of the term loan on October 29, 2004. The Company made $15 million draws on the revolving credit facility on November 30, 2004 and February 28, 2005, and we made a $5 million payment on December 31, 2004 and a $10 million payment on March 18, 2004.

The $100 million revolving credit facility is available for working capital and general corporate purposes and has a variable interest rate based on market rates. On August 20, 2004, November 22, 2004, and February 23, 2005, the credit facility was amended to relax certain covenants to provide us additional flexibility for fiscal year 2005. The credit facility contains certain financial and non-financial covenants customary for financings of this nature.

We believe that our current level of cash on hand, future cash flows from operations, and our credit facility are sufficient to meet our operating needs in fiscal 2005 and the first half of fiscal 2006.

We believe that free cash flow, defined as net cash provided by operating activities less capital expenditures and dividends paid, is a meaningful measure of our ability to generate cash for reducing our level of senior debt. Free cash flow is not a Generally Accepted Accounting Principle (“GAAP”) measurement and may not be comparable to free cash flow reported by other companies. Free cash flow decreased to $(8.1) million in the first six months of fiscal 2005 compared to $28.5 million in the first six months of fiscal 2004 due to decreased Net cash provided by operating activities and partially offset by reduced Capital expenditures in the first six months of fiscal 2005.


	Six Months Ended
	November 26, 2004			November 28, 2003
(In thousands)				(As Restated)
Net cash provided by operating activities	$	12,400		$	52,982
Capital expenditures		(17,963	)		(21,639	)
Dividends paid		(2,880	)		(2,820	)

Free cash flow	$	(8,443	)	$	28,523

Stock activities provide us an additional source of liquidity. Stock activities are primarily related to the exercises of employee stock options and issues under the employee stock purchase plan. In the first six months of fiscal 2005, issuance of shares of our common stock provided $0.5 million versus providing $2.6 million in the first three months of fiscal 2004. Although the issuance of additional shares provides us with liquidity, it results in a dilution of each individual stockholder’s equity. Another use of cash is the payment of dividends which totaled $2.9 million in the first six months of fiscal 2005 and $2.8 million in the first six months of fiscal 2004.

Discontinued Operations used $2.8 million of cash in the first six months of fiscal 2005 and used $2.3 million in the first six months of fiscal 2004. Cash used in the first six months of fiscal 2005 was related to payments for renegotiated data contracts in Germany partially offset by proceeds from the sale of the United Kingdom business of $8.6 million.

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS 123 (R), “Share-Based Payment,” (“SFAS 123(R)”) which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123 (R) requires that compensation cost relating to all share-based payment transactions, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123 (R) is effective the first interim or annual reporting period that begins after June 15, 2005. NDCHealth expects to adopt SFAS 123 (R) on September 3, 2005 and expects to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date (a) based on the requirements of SFAS 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123 (R) that remain unvested on the effective date.

Safe Harbor Statement

The Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other portions of this report, include “forward-looking” statements (rather than historical facts) within the meaning of the federal securities laws that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Forward-looking statements are only predictions and are not guarantees of performance, and include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future capital expenditures, the likelihood of our success in developing and introducing new products and expanding our business, the timing of the introduction of new and modified products or services, financing plans, working capital needs and sources of liquidity.

These forward-looking statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important risks and assumptions relating to the forward-looking statements include, without limitation: (1) our ability to expand in new and existing markets; (2) demand for our products and services; (3) the cost of product development; (4) the timely completion, market demand and acceptance of our new products; (5) competitive forces; (6) gains in market share; (7) industry conditions affecting our customers; (8) expected pricing levels; (9) expected growth of revenue and net income; (10) the timing and cost of planned capital expenditures; (11) the availability of capital to invest in business growth and expansion; (12) the timing of recognition of certain revenue; (13) access to data from suppliers; (14) the potential for information or network services interruptions; (15) adequate protection of proprietary technology; (16) unanticipated changes in accounting rules and/or interpretations; (17) complex state and federal regulations and their impact on the demand for information products or availability of certain data; (18) outcomes and cost of pending litigation and/or the pending SEC investigation; (19) expected synergies relating to acquisitions, joint

ventures and strategic alliances; (20) expected proceeds from the disposition of certain assets; (21) our ability to maintain compliance with certain restrictive debt covenants; (22) our substantial indebtedness, which could adversely affect our financial condition, results of operations and liquidity; (23) actions that were or may be taken by credit rating agencies; and (24) our ability to comply with Sarbanes-Oxley. Many of these risk factors and assumptions are beyond our ability to control or predict, and are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in later filings with the SEC.

We believe our forward-looking statements contained herein are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on our current assumptions and expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk from that disclosed in our Annual Report on Form 10-K/A for the year ended May 28, 2004.

ITEM 4—CONTROLS AND PROCEDURES

The Company conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

Based upon the evaluation it was determined that, for the reasons described below, the Company’s disclosure controls and procedures were not effective as of the end of the fiscal period covered by this report to give reasonable assurance in alerting it in a timely fashion to material information relating to NDCHealth that is required to be included in the reports that the Company files under the Exchange Act.

As previously disclosed in January 2005, we engaged in a review and analysis of practices regarding software exchanges in our Physician business and their impact on revenue recognition. Additionally, we have revised our revenue recognition practices for our IHR products within our Information Management segment. As a result of our efforts, we have determined that Net Income should be adjusted. In addition, in reviewing our past practices, procedures and processes, we determined that there needed to be revisions to such practices, procedures and processes. In this regard, we concluded there were material weaknesses in our internal controls over revenue recognition and over the financial statement close process. We have taken, and continue to take, steps to rectify these matters.

Based upon our review and analysis, we determined that adjustments related to Physician software exchanges and Information Management revenue recognition should be recorded. We also determined that the adjustment required a restatement of our financial results for each of the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002, as well as our interim results for the quarter ended August 27, 2004, to reflect the impact of the adjustments on each of the periods presented.

In connection with the aforementioned review, we also determined that adjustments relating to other items should be recorded. These adjustments are also reflected in the restatement of financial results described above.

Furthermore, on March 17, 2005 we received a material weakness letter from our Independent Registered Public Accounting Firm, Ernst & Young LLP, regarding these same issues.

To date, we have taken steps to improve our internal controls including the following:

•

Revised our practices in Physician services to terminate all software exchanges in policy and practice with our VARs except when both the purchase and associated exchange of products occur within the same fiscal quarter that a new software version is released;

•

Brought a new general manager and a new financial manager into our Physician unit;

•

Added resources to the corporate accounting department to allow for more thorough analysis and determination of appropriate revenue recognition and to improve the financial statement close process;

•

Enhanced process for reviewing and monitoring sales contracts to properly develop revenue recognition;

•

Augmented review of these transactions to ensure adherence to our revenue recognition policies; and

•

Improved process for documentation and review of significant accounting entries, including revenue recognition.

We intend to continue to monitor our internal controls, and if further improvements or enhancements are identified, we will take steps to implement such improvements or enhancements. In addition, the Company is undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company’s management to report on, and the Independent Registered Public Accounting Firm to attest to, the effectiveness of the Company’s internal control structure and procedures for financial reporting. The Company expects it will not be able to fully remediate these deficiencies by May 27, 2005, given the efforts needed to completely remediate the internal control material weaknesses associated with revenue recognition and the financial statement close process, as described above. In the event the Company has material weaknesses in internal controls relating to the process of revenue recognition and/or the financial statement close process at May 27, 2005, the Company’s management will disclose such weaknesses in its report and will not be able to conclude that the Company’s internal control over financial reporting was effective at such date. Similarly, the Company believes that such material weaknesses would be referenced in an adverse opinion on the effectiveness of internal controls over financial reporting from our Independent Registered Public Accounting Firm around internal controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Other than the changes identified above, there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s second quarter fiscal year 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

It should be noted that the design of any system of controls is based upon certain assumptions about the likelihood of future events, and there can be no assurance that such design will succeed in achieving its stated objective under all potential future conditions, regardless of how remote.

PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

On April 7, 2004, a putative securities class-action, captioned Garfield v. NDCHealth Corporation, et al., was filed in the United States District Court for the Northern District of Georgia against NDCHealth and Messrs. Hoff and Hutto. On September 1, 2004, a second amended complaint was filed. The second amended complaint added Messrs. Miller, Shenk, FitzGibbons and Adrean, as well as Ernst & Young, as defendants. The second amended complaint generally alleges, among other things, that members of a purported class of stockholders who purchased common stock between October 1, 2003 and August 9, 2004 were damaged as a result of (i) improper revenue recognition practices in the Company’s physician business unit; (ii) the failure to timely write-down the Company’s investment in MedUnite; and (iii) the improper capitalization and amortization of costs associated with software development. The second amended complaint alleges that, as a result of such conduct, the Company’s previously issued financial statements were materially false and misleading, thereby causing the prices of the Company’s common stock to be inflated artificially. The second amended complaint asserts violations of Section 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks unspecified monetary damages and other relief. On October 13, 2004, the Company and the individual defendants filed a motion to dismiss the second amended complaint. The motion is fully briefed and the parties are currently awaiting a decision by the court.

ITEM 2—UNREGISTERED

SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter ended November 26, 2004.

ITEM 3—DEFAULTS

UPON SENIOR SECURITIES

There were no defaults upon our senior securities during the quarter ended November 26, 2004.

ITEM 4—SUBMISSION

OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2004 Annual Meeting of Stockholders of NDCHealth Corporation was held in Atlanta, Georgia on October 24, 2004. At the annual meeting, the stockholders of the Company voted on the following items:

Election of three directors in Class III to serve until the annual meeting of stockholders in 2007, or until a successor is duly elected and qualified. Votes cast were as follows:


	In Favor	Withheld
J. Veronica Biggins	16,443,625	3,693,003
Terri A. Dial	18,042,607	2,094,021
Kurt M. Landgraf	16,758,049	3,378,579

Besides J. Veronica Biggins, Terri A. Dial and Kurt M. Langraf, elected at the 2004 Annual Meeting of Stockholders, the terms of office as directors of Laurie H. Glimcher M.D., James F. McDonald, Jeffrey P. Koplan, M.D., Walter M. Hoff, Steven J. Shulman, and Neil Williams continued after the meeting.

Approval of the NDCHealth Corporation 2005 Incentive Plan. Votes cast were: For 9,383,539; Against 10,246,287; Abstain 3,608,169.

Stockholder proposal recommending engagement of an investment bank. Votes cast were: For 18,889,019; Against 3,476,848; Abstain 402,348

ITEM 5—OTHER

INFORMATION

None

ITEM 6—EXHIBITS

AND REPORTS ON FORM 8-K


(a)		Exhibits:

3(ii)		Amended and Restated By-laws of the corporation adopted on September 21, 2004 (filed as exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated September 24, 2004, file No. 12392, and incorporated herein by reference.)

10		Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)

10(i)		Employment Agreement between Charlene Crusoe-Ingram and the Registrant dated October 5, 2004.

10(ii)		Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)

31(i)		Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff

31(ii)		Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Lee Adrean

32		18 U.S.C. Section 1350 Certification

(b)		Reports on Form 8-K were filed or furnished during the quarter ending November 26, 2004. The items reported, any financial statements filed, and the dates of any such reports are listed below.
(i)		NDCHealth Corporation’s Current Report on Form 8-K filed on September 22, 2004, announcing a change in the Company’s senior management under Item 5.02 and furnishing a press release as an exhibit under Item 9.01

(ii)		NDCHealth Corporation’s Current Report on Form 8-K filed on September 24, 2004, reporting under Item 5.03 the amendment of the Company’s By-Laws and furnishing the By-Laws, as amended, as an exhibit under Item 9.01.

(iii)		NDCHealth Corporation’s Current Report on Form 8-K furnished on September 30, 2004, announcing the Company’s financial results for its quarter ended August 27, 2004 under Item 2.02 and furnishing a press release and financial information as exhibits under Item 9.01.

(iv)		NDCHealth Corporation’s Current Report on Form 8-K furnished on October 13, 2004, announcing a further request by the Securities and Exchange Commission with respect to the Company’s accounting for software development costs under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

(v)		NDCHealth Corporation’s Current Report on Form 8-K furnished on October 28, 2004, announcing an internal review of the Company’s physician software exchange practices under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

(vi)		NDCHealth Corporation’s Current Report on Form 8-K furnished on October 29, 2004, announcing the completion of the sale of its business operations in the United Kingdom under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

(vii)		NDCHealth Corporation’s Current Report on Form 8-K furnished on November 4, 2004, announcing the results of matters submitted to a vote of the Company’s stockholders at their Annual Meeting on October 28, 2004 under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.



(viii)		NDCHealth Corporation’s Current Report on Form 8-K furnished on November 9, 2004, announcing the final results of matters submitted to a vote of the Company’s stockholders at their Annual Meeting on October 28, 2004 and announcing the Board of Directors’ decision to commence an orderly process to retain an investment bank to assist in a review and analysis of strategic alternatives available to the Company under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

(iv)		NDCHealth Corporation’s Current Report on Form 8-K furnished on November 24, 2004, reporting under Item 1.01 the amendment of the Company’s Credit Agreement, reporting under item 7.01 the Company’s press release dated November 23, 2004 announcing the amendment, anticipated restructuring charges, and EPS guidance for the quarter, and furnishing the press release and Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 as exhibits under Item 9.01.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


NDCHEALTH CORPORATION (Registrant)

By:		/s/ JAMES W. FITZGIBBONS
		James W. FitzGibbons Chief Accounting Officer (Authorized Signing Officer and Principal Accounting Officer)

Date: March 21, 2005

INDEX TO EXHIBITS


Exhibit Numbers		Description

10	(i)	Employment Agreement between Charlene Crusoe-Ingram and the Registrant dated October 5, 2004.

10	(ii)	Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)

31	(i)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff

31	(ii)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Lee Adrean

32		18 U.S.C. Section 1350 Certification